As widely telegraphed, the European Central Bank (ECB) kept its policy rates unchanged, but the tone of the meeting reflected a far more complicated backdrop.

On one side, inflation risks are clearly building again. Indeed, higher energy prices are set to keep inflation well above target in the near term, and the bank openly acknowledged that risks to inflation are now tilted to the upside. That alone would normally argue for a more cautious stance on easing.

But the other side of the equation is becoming increasingly difficult to ignore. On this, the growth outlook is weakening with the central bank citing increased uncertainty, lower business confidence and rising pressure on supply chains. High energy costs are not only lifting inflation, but also eroding household incomes and discouraging investment, a combination that is starting to weigh on activity… and on some officials’ views.

When Christine Lagarde addressed the press, the message was one of caution and balance. She noted that the economy had entered this period of turbulence from a relatively solid starting point, with domestic demand still providing some support and households in a reasonably strong financial position. However, she also made it clear that the outlook has become highly uncertain and that risks to growth are now firmly tilted to the downside.

At the same time, there were few signs of alarm on underlying inflation. Wage pressures appear to be easing gradually, and longer-term inflation expectations remain anchored around the 2% target. That gives the ECB some room to wait, even as near-term price pressures pick up again. It does seem reasonable to wait, but how long?

Bottom line

The ECB is navigating a classic stagflation risk: energy is pushing inflation higher, while growth is losing momentum. For now, that keeps policymakers firmly in wait-and-see mode, with no commitment to a particular rate path and a growing focus on how the balance between inflation and growth evolves in the coming months.